External financing for low-income emerging markets could increasingly be split into camps dominated by lending from China and from Western investors and multilateral institutions, according to an economist.
Across the world, government finances have undergone major swings over the last three years amid the Covid-19 pandemic, the Russia-Ukraine war and ensuing government actions.
Low-income countries that often rely on external debt have been particularly hard hit amid rising interest rates and a strengthening US dollar.
“The increasingly diverse array of creditors to debt-distressed EM governments – and the difficulties in getting China and Western lenders to see eye to eye – is already gumming up sovereign debt restructurings,” William Jackson, Chief Emerging Markets Economist, Capital Economics, said on April 17.
“And despite some positive noises from the latest World Bank and IMF meetings, this is likely to be a sign of things to come as the global economy continues to fracture.”
For the fiscally-strained countries, it would prolong economic pain and delay their ability to regain access to global capital markets, Jackson added.
Growing debt pile
Global public debt surged to a historic 100 percent of the gross domestic product (GDP) in 2020 and eased to about 92 percent at the end of 2022, still about 8 percentage points above the level at the end of 2019, according to the International Monetary Fund.
The public-debt-to-GDP ratio in low-income developing countries remained elevated at about 48 percent, a level not seen since the early 2000s, the IMF said in a report this month.
The average government-debt-to-GDP ratio in emerging markets excluding China is projected to rise to about 59 percent of GDP through 2028, above its pre-pandemic level, with some countries facing growing concerns about debt vulnerabilities, it added.
“In low-income developing countries, concerns persist regarding heightened debt vulnerabilities because of high debt levels, with 39 countries already in or near debt distress,” according to the multilateral body.
Sri Lanka defaulted in 2022 and Pakistan and Tunisia are on the verge. Debt payments on so-called frontier government’s foreign currency bonds rise in the coming years.
Also read: Nirmala Sitharaman attends high-level meeting on Sri Lankan debt issues
Debt recast hurdles
The difficulties of restructuring the debt of low-income emerging markets have been around since the start of the pandemic in 2020.
While in the 1980s and 90s, these emerging markets had a relatively small group of external creditors – mainly G7 governments and Western banks – they now have a much wider range of creditors, including China and a multitude of private bond investors.
“Not only does the broader array of creditors make it more difficult to reach debt restructuring agreements, but tensions between Western investors and China have held up talks too,” according to Capital Economics.
It listed points of contention, including a lack of transparency about the scale of Chinese debt, China’s preference for restructuring debt on a case-by-case basis and, most recently, demands from China that multilateral lenders take losses in Zambia’s debt restructuring (which would be unprecedented).
Western lenders could be reluctant to lend to countries that are heavily indebted to China, fearing that any eventual sovereign default would be protracted and messy, Jackson said.
A joint statement at last week’s World Bank and IMF Spring Meetings reaffirmed the commitment on the part of international creditors to improve the debt-restructuring framework.
Also read: World Bank, IMF Spring Meetings 2023: What did FMs, central bank governors discuss?
Still, with the global economy fracturing, it’s hard to see trust between China and other creditors improving, Jackson said.
Estimates from Fitch Ratings show that the average time taken to secure a sovereign debt restructuring has increased from 35 days to 107 days, which adds to the economic pain.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
